Balance Sheet Structure#

The balance sheet tells you what a company owns and owes at a specific moment in time. It's like a photograph of the company's financial position.

While the income statement shows performance over a period (like a movie), the balance sheet shows position at a single point in time (like a photograph). It's always dated "as of" a specific date.

The Fundamental Equation#

The balance sheet is built on one equation that must always hold true:

Assets = Liabilities + Shareholders' Equity

This is called the accounting equation or balance sheet equation. It's why the statement is called a "balance" sheet—the two sides must always balance.

What Each Component Represents#

Component	What It Means	Analogy
Assets	What the company owns	Your house, car, savings
Liabilities	What the company owes	Your mortgage, car loan, credit cards
Shareholders' Equity	Net worth (Assets minus Liabilities)	Your net worth

Why It Must Balance#

Think of it this way: every asset must be funded somehow. Either:

Someone lent the company money (liability), or
The company earned it or shareholders invested it (equity)

There's no other way to get assets—they come from debt or equity.

Rearranging the Equation

You can rearrange the equation to show net worth:

Shareholders' Equity = Assets - Liabilities

This is the company's "book value"—what shareholders theoretically own after paying all debts.

Balance Sheet Format#

Balance sheets typically follow this structure:

ASSETS
├── Current Assets
│   ├── Cash and Cash Equivalents
│   ├── Accounts Receivable
│   ├── Inventory
│   └── Prepaid Expenses
└── Non-Current Assets
    ├── Property, Plant & Equipment
    ├── Intangible Assets
    └── Long-term Investments

LIABILITIES
├── Current Liabilities
│   ├── Accounts Payable
│   ├── Short-term Debt
│   └── Accrued Expenses
└── Non-Current Liabilities
    ├── Long-term Debt
    └── Deferred Tax Liabilities

SHAREHOLDERS' EQUITY
├── Common Stock
├── Additional Paid-in Capital
├── Retained Earnings
└── Treasury Stock

Current vs. Non-Current#

The key distinction on both sides is timing:

Current (Short-term)#

Expected to be converted to cash (assets) or paid (liabilities) within one year
Indicates short-term liquidity

Non-Current (Long-term)#

Not expected to be converted to cash or paid within one year
Represents long-term structure

This current/non-current split helps you assess both liquidity (can the company pay its bills?) and solvency (is the company financially stable long-term?).

A Simple Example#

Here's a simplified balance sheet:

ASSETS	Amount
Cash	$50,000
Accounts Receivable	$30,000
Inventory	$40,000
Total Current Assets	$120,000
Property & Equipment	$200,000
Total Assets	$320,000

LIABILITIES	Amount
Accounts Payable	$25,000
Short-term Debt	$15,000
Total Current Liabilities	$40,000
Long-term Debt	$100,000
Total Liabilities	$140,000

SHAREHOLDERS' EQUITY	Amount
Common Stock	$50,000
Retained Earnings	$130,000
Total Equity	$180,000

Check: Assets ($320,000) = Liabilities ($140,000) + Equity ($180,000) ✓

Point-in-Time Nature#

The balance sheet is dated "as of" a specific date—typically the last day of a quarter or year.

Window Dressing

Companies sometimes engage in "window dressing"—taking actions right before quarter-end to make the balance sheet look better. For example, collecting receivables aggressively or delaying payments. Compare multiple periods to spot unusual patterns.

Key Ratios Preview#

The balance sheet is the source for many important financial ratios:

Ratio	What It Measures	Formula Preview
Current Ratio	Short-term liquidity	Current Assets ÷ Current Liabilities
Debt-to-Equity	Leverage	Total Debt ÷ Shareholders' Equity
Book Value per Share	Net worth per share	Equity ÷ Shares Outstanding

We'll explore these ratios in detail in Module 5.

How to Read a Balance Sheet#

Step 1: Check the Date#

When is this snapshot from?
Is it the most recent period?

Step 2: Review Total Assets#

How large is the company?
What's the mix of current vs. non-current assets?

Step 3: Examine Liabilities#

How much debt does the company have?
What's due soon vs. long-term?

Step 4: Calculate Net Worth#

Assets minus Liabilities = Shareholders' Equity
Is equity growing over time?

Step 5: Compare to Prior Periods#

How have assets, liabilities, and equity changed?
Are trends moving in the right direction?

Key Takeaways

The balance sheet shows what a company owns (assets) and owes (liabilities) at a point in time
The fundamental equation: Assets = Liabilities + Shareholders' Equity
Current items are expected to convert or be paid within one year
Non-current items are longer-term
The balance sheet always balances—every asset is funded by debt or equity
Compare multiple periods to identify trends and spot window dressing